Why home-spun inheritance tax planning doesn’t always work: Six IHT questions answered

Published: 02:26 EST, 15 October 2015 | Updated: 11:45 EST, 16 October 2015

View
comments

The number of estates being hit by inheritance tax is on the rise – largely driven by the rise in house prices over the past two decades.

As families find themselves dragged into the inheritance tax net – especially in England’s southern regions where property prices are high – more are tempted to indulge in a spot of home-spun tax planning to try to dodge a bill, rather than seeking professional advice.

But often some seemingly straightforward arrangements will not always achieve the desired results. So, why not?

Geoffrey Todd, a partner, and Jenny Wilson-Smith, a solicitor in the private client and tax team, at law firm Boodle Hatfield answer some common questions below to explain more.

Care free: planning ahead can save your family money and give you peace of mind

Can I get married just before I die?

Married couples benefit from generous IHT reliefs. The survivor can normally inherit tax free as well as benefitting from the deceased's unused Nil Rate Band (currently £325,000) and, from April 2017, from the deceased's main residence allowance on their death.

Therefore the terminally ill may believe that marrying their partner will give them a greater degree of financial security. However, failing to update a will at the same time may mean that this does not happen and could make the situation worse as marriage automatically invalidates any existing will.

This results in the estate being ‘intestate’ so that the assets pass in a fixed way set down by law: the surviving spouse will only be entitled to a limited amount of the deceased's assets, which may well be insufficient for their needs, with the outcome rarely what the deceased intended.

Can I give away assets but still keep hold of them?

Broadly, you are subject to IHT on assets you own at your death. Therefore a logical solution may be to formally give away assets, such as artworks or jewellery, but to carry on using them or to keep them in your home.

Sometimes it is presumed that you can even do this with the family home, for example by transferring the legal title but carrying on living there. Years ago this type of planning may have been possible but there is now legislation in place to stop this.

This means giving away assets from which you can continue to benefit will normally result in them remaining in your IHT estate and it can lead to more capital gains tax being payable than would otherwise have been.

Giving away the family home before you die won't necessarily make probate any quicker

Can I give my home away on my deathbed?

The family home is often an individual's most valuable asset and is sometimes given away shortly before death so that the intended beneficiary will not have to wait until probate has cleared before becoming entitled to it and in the hope that no IHT will arise. This is partially correct.

It is possible to make a gift (of any asset not just property) immediately before death but four conditions must be met: the gift must be made when the donor believes death is impending; the donor must die; the donor must physically part with the gift in some way; and the gift must be capable of being given away.

In addition the testator must be sufficiently mentally alert to sign any legal document. Practically these conditions can be difficult to meet in relation to property but if they are the property passes straight to the intended beneficiary rather than becoming part of the deceased's estate.

However, it makes no difference to the amount of IHT payable, as gifts made within three years of death are fully chargeable to IHT.

Can I write a cheque to be cashed after my death?

Professional help can avoid common will mistakes

One might assume that if you write a cheque, the gift would take effect immediately saving the beneficiary the bother of having to wait for probate whilst reducing the value of the estate chargeable to IHT.

However, this simply does not work if the cheque is to be cashed after death because as soon as an individual's death is certified their bank must be notified and the account is then frozen, leaving those holding cheques unable to cash them.

Even if the cheque is cashed immediately the transaction it is not actually completed unless the funds clear before the deceased died. Further, as with assets given away on the deathbed, even if the cheque cleared in time it would make no difference to the amount of IHT payable.

Can I make an informal loan and then write it off?

Any loans that are owing to the deceased on his death, even informal ones to family members, will form part of his taxable estate on his death. It is sometimes thought that if such a loan is written off before death there will be no IHT liability.

However, in practice the Revenue will not consider that a loan has been ‘forgiven’ unless there is formal evidence of the intention. It is not enough to waive a debt verbally or by a letter – it must be done by way of a deed and formally witnessed.

Again, even if the debt is formally waived, full IHT would still be payable if the deceased died within three years of waiving the entitlement.

Can I write my own will?

It is often tempting for people to write their own wills because it is cheaper than instructing a professional, and they are of course free to do so. There are, however, important formalities that need to be complied with and an incorrectly prepared will may be invalid.

Common mistakes include failing to have two independent witnesses when signing it, ambiguous or unclear wording and failing to cover all eventualities. Homemade wills often also fail to consider tax implications, leading to higher tax bills and are more likely to lead to disputes between beneficiaries, for instance because dependants or close family members have not received what they expected to.